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When it comes to financing elements of your business, you might be tempted to take out one large loan that you will then apply to the whole kit and caboodle. However, it may be in your best interest to look into many smaller loans so that you can get the best rates for whatever you’re trying to finance.

All this to say, if you have expensive equipment that you need to use at your business, it’s a good idea to look into equipment financing.

What Is Equipment Financing?

As you may be able to guess, equipment financing is the financing of equipment. Many businesses will decide that they need to receive excess capital to purchase their expensive equipment. If they do this, they will be spreading out the cost of the equipment over the entire life of the item. This is a great way to help businesses that are just starting out get the necessary funds they need.

Equipment financing is also a way for businesses to free up some capital that they can then spend in other places.

When you finance something, you are – essentially – saying that you will pay x amount a month for a set number of months that will equal the total cost of the item (plus any applicable interest).

Just make sure that what you are trying to finance counts as equipment. It has to be a physical item that will be used in your business to further your sales (oven in a restaurant, tire pressure machine in an automobile garage, X-ray machine in a doctor’s office, etc.).

Importance of Equipment Financing

Many businesses that require large start-up costs and expensive equipment look at the option of equipment financing as a godsend. It can be extremely beneficial for these sorts of businesses.

Additionally, not only is it helpful to curb startup costs but financing your equipment will offer many other benefits for your business:

• Pursuing equipment financing will free up other parts of your capital.

Let’s say that the machine you need for your business is $50,000. Rather than having to pay that $50,000 upfront, you can finance the equipment and enter into an agreement that you’ll pay ~$420 a month for ten years.

This means that you’ll have the extra money that you might have spent on the machine to spend on other things.

Of course, if you will be on the hook for this money for ten years. Only take out this type of loan if you think you’ll be able to commit to a $420 a month payment (plus associated fees) for the agreed-upon time period.

• Equipment financing is a flexible option for business owners.

Each time you finance equipment, you will get a new agreement that will be tailored to your specific needs. This means that you will be able to customize your repayment plan and agreement with whoever is in charge of the finance loan to work best for you and your business at the time.

• Equipment financing can improve your credit score.

Equipment financing is a great way to increase your credit score! Your credit score is made up of details that look into how often you pay your bills on time, and how often you only pay the minimum versus paying the whole amount.

As such, if you utilize equipment financing, you’ll be adding proof to your credit history that you’re a responsible person when it comes to repayment. The more responsible you look on paper, the higher your credit score will end up being.

Many businesses need financing in order to purchase equipment or inventory, pay their employees on the offseason, and to gain new locations. However, most people are not prepared for the drawbacks that some alternative types of loans can provide. By looking at all aspects of a financing option, you can better understand the full impact a specific loan will have on your business.

What is a Hard Money Loan?

A hard money loan basically offers the same financing as a traditional bridge loan, except it is processed and funded by private lenders. Many investors use hard money loans to refurbish and sell real estate. These loans are typically for the short term and don’t require the same credit scores, lengthy processing time, or past history of repayment records. Instead, they base their approvals on collateral put up against the amount needed in a loan. In order to ensure that they are able to get their money back in case a business defaults on the loan, their loan-to-value (LTV) ratios are low (anywhere from 50% to 70%).

Drawbacks of a Hard Money Loan

Even though hard money loans can provide fast money to businesses, they aren’t meant for the long term. Businesses often find that high interest rates on this type of loan make it hard to get ahead and only allow a short period of time to pay the money back. If a business misses a payment or defaults on the loan entirely, they lose the asset they put up as collateral to that private lender.

Alternatives to a Hard Money Loan

There are many other commercial financing options out there to choose from other than hard money loans. Microloans, for one, are often used with startups that need relatively small loans (up to $50,000) and don’t have much credit history or can’t get approved for traditional loans. Those looking at hard money loans might find a great alternative in SBA microloans! However, if you really need an extremely similar loan to a hard money loan, consider going through a traditional bank for a bridge loan. Not only can they work with you for financing options for down the road, but they can often be flexible in your repayment terms if something arises.

While hard money loans might not be your best option, an experienced loan officer can advise you in the best course of action for your business. To schedule a consultation on loan options, give us a call today!